What's in a shade? The market relevance of green bonds’ external reviews

With the growth of green bonds as an asset class, the certification of the actual climate footprint of projects financed with these bonds is gaining momentum among investors and policymakers. We investigate the informative content of Second Party Opinions (SPOs) issued by external reviewers who assess the quality of green bonds by collecting a global sample of over 1200 corporate green bonds and analyzing matching results for 336 of them. We show that the market assigns a premium to the green bonds with the best SPOs' valuation - namely, the “dark-” and “medium-” green bonds. However, in presence of a formal credit rating, SPO external reviews do not appear to incorporate distinctive information priced by the market. Using a difference-in-difference approach, we find that stricter green investment regulations, like the adoption of the “EU Taxonomy,” produce a “fly-to-quality” effect that widens the spread between dark and lighter green bonds' returns. Responsible investors also appear to rely on the judgement of external reviewers when a formal credit rating is absent, and they have significantly higher stakes in the greener bonds. Overall, our results indicate that SPO external reviews can reduce information asymmetry between issuers and investors absent of a credit rating, but they are not informative for rated green bonds.